THH AND ANOTHER v. THE COMMISSIONER OF ESTATE DUTY

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. In these proceedings, the plaintiffs seek a declaration, together with costs, against the Commissioner of Estate Duty that no estate duty is leviable in Hong Kong on the death of the insured person on the proceeds of the abovementioned Policy of Insurance.

2. The plaintiffs are surviving father and sister of the deceased insured. The Insured signed a Travel Insurance Proposal Form with Gilman Insurance, an agent of Commercial Union Assurance Company, plc. The period covered was the usual short span of 10 days for travel insurance from 26th August 1988 to the 4th September 1988. $3M was the maximum sum insured against personal accident, payable as to medical expenses at a comparatively modest percentage and as to disablement, incapacity or death on an ascending scale from 0.4% to 100%.

3. In the Proposal Form, the insured nominated the second-named plaintiff, his sister as  a beneficiary. The Proposal Form required the Insured to sign against a nomination other than that of a spouse. The Insured so signed on the form.

4. On the 2nd September 1988, the Insured met with a fatal accident on a business trip to China. The abovementioned Travel Insurance Policy was duly issued, but despatched after his death. The Insured had previously taken out travel insurance with the Insurers in the same format, and it is common ground that the printed terms of the Travel Insurance Policy, together with the endorsements thereon, issued pursuant to the said Proposal Form encapsulated the contractual terms between the Insured and the Commercial Union Assurance Company, plc.

5. By the said Travel Insurance Policy, "subject to the terms exceptions and conditions (therein) or endorsed(thereon)" the Insurers agreed "that in the event of the contingencies described hereafter happening during the Period anywhere in the world the Company will .... pay to the Insured or his legal personal representatives: the percentage ranging from well below 0.4% for medical expenses to 100% for fatal accident. One of the endorsements on the policy reads:-

"COMPENSATION PAYABLE TO NAMED BENEFICIARY

In the event of the death of the Person-Insured in circumstances giving rise to a valid claim under this Policy Compensation may be. payable to the person named in the Schedule or any list which forms part of the Policy as the Beneficiary whose discharge to the Company in respect of any such payment shall be a full and binding discharge to the Company."

6. Of the conditions in the Travel Insurance Policy, Condition 6 reads:-

"6.    No alteration and/or addition to the printed terms or conditions of this Policy shall be valid unless initialled at the Head Office or Branch Office of the Company."

7. The Travel Insurance Policy did not provide for revocation of any named beneficiary. The Commissioner of Estate Duty, through his Deputy, sought clarification from the Insurers : two questions were asked in this direction and corresponding replies were given by Gilman Insurance

8. From the general tenor of these replies, Mrs Clough, counsel for the plaintiffs, understood them to mean that consent for every proposed revocation and substitution had to be obtained from the Insurers who would have the right to accept or decline an endorsement although no request would be unreasonably refused. Counsel's paraphrasing has much to commend itself. Further more, these replies of Gilman Insurance merely set out, without prejudice, their layman's view of Condition 6.  Gilman Insurance may or may not take a different stance if and when they are properly advised. Moreover. the duty to construe Condition 6 and the other provisions in the Travel Insurance Policy lies with this Court, and to this end those replies are clearly as inadmissible as they are immaterial.

9. The insurance-money payable for the death of the Insured is $3 m. Mr. Whaley for the Commissioner sought to fix Estate Duty liability to this $3m under section 5 and section 6(1)(a) of the Estate Duty Ordinance. Insofar as they are relevant, these provisions are as follows

10. Under section 5 of the Estate Duty Ordinance, Mr Whaley contended that on the true construction of the Travel Insurance Policy, its primary object was to benefit the estate of the Insured after his death. Such was, so counsel submitted, the target of the policy. The primary object therefore stood in priority to and had the effect of overriding all other subsidiary objects. Counsel concluded that this target could not be achieved unless the policy moneys would first enure to the benefit of the Insured or his estate. This would bring the policy moneys within section 5. Under section 6(1)(a) of the Ordinance, it was argued on behalf of the Commissioner that the Insured and, on his death, his personal representative had the right to unilaterally intercept the policy moneys i.e. without the insurers' consent. Shortly put, the questions are : under section 5, whether the primary,object of the Travel Insurance Policy conferred on the Insured or his estate a prior right to receiving the policy moneys. Under section 6(1)(a), whether the insured or his estate could unilaterally intercept the policy moneys and was thus competent to;dispose of them.

11. The right, if any, to unilaterally intercept policy moneys must derive from the terms of the Travel Insurance Policy themselves. Mrs Clough, counsel for the plaintiffs, relied heavily on the fact that the policy contained no provision to deflect payment of the insurance-money. That brought about the Commissioner's unrewarding endeavours to test the Insurers reaction to a change of beneficiary, already nominated. Revocation of the nomination of a beneficiary would have the effect of intercepting the policy moneys. The Insured and his estate could not be said to be competent to dispose of the insurance-money under section 6(1)(a) without such a unilateral right to intercept or a power to replace a nominated beneficiary at will. The earlier decisions are quite confused. They have been doubted, sought to be explained, and may be taken as overruled. Three decisions were selected for my consideration. 'They all dwelt upon the right of a stranger to a contract.

12. Cleaver & Others v. Mutual Reserve Fund Life Association, [1892]1 QB 147 was a case of a life insurance  taken out by an insured for £2,000 payable to his wife, if living at the time of his death, otherwise to the legal representatives of his estate. The insured died from, poison. His widow was successfully prosecuted for having intentionally administered it to him. Section 11 of the Married Women's Property Act, 1882 vested the whole benefit of the insurance-money in the surviving widow. Without the conviction, she would have been the only person interested in the policy money. A statutory trust in her favour thus arose. However, equity would not permit the convicted widow to take advantage of or recover on the insurance policy.That statute aside, it was held that the widow was not a party to the contract of insurance and that as a stranger. she could not enforce it at law. The decision ultimately turned on the construction of the policy. At P.153, Lord Esher, M.R. concluded :

"On the true construction of the policy, the only persons who could claim under- it, and give a valid receipt for the money insured, were the executors of the insured."

Fry L.J. and Lopes L.J. agreed with that conclusion. The basic approach to it differed as between Lord Esher and Fry L.J. Whilst Lord Esher took the view that independently of the 1882 Act, the provision for payment to a stranger payee had no effect at law, at p.157 Fry L.J.'s opinion was that the insurers must strictly perform such provision which was contractually binding and "would be broken by non-payment to" the widow.

13. In re Engelbach's Estate, Tibbetts v. Engelbach [1924]2 Ch. 348 was a case.of an endowment policy taken out by a father for the benefit of his daughter to mature on her attaining 21. Cleaver was followed and applied by romer J. As a stranger to the insurance contract, the daughter could not sue on it. There was no intention on the part of the insured to constitute himself a trustee for his daughter of either the policy or the policy moneys. That was the decision of Romer J. who noted the different wording "the insured, for his daughter aged one month" in Engelbach from that in the expression used in Cleaver "the policy to be effected for the benefit of (the insured's) wife". Romer J. said of the former in these terms :-

"I cannot think that this is the true construction of this proposal form. It appears to me extraoridinarily unlikely that the father would purport to enter into such a contract as agent for his daughter who was one month old, a contract which involved, if the father and the daughter were to get any benefit out of it, the continuous payment of a premium by the father. I think that the words of the proposal really mean no more in this case than a proposal made in the (Cleaver) Case."

This final observation in Engelbach highlights the decision as one primarily on construction.

14. In In re Sinclair's Life Policy, [1938]1 Ch 799 was another case of endowment policy in the name of the insured for the benefit of his godson to mature in 17 years. Cleaver and Engelbach were relied upon. At page 803, Farwell J. stressed` the want of privity of contract in the godson for him to be able to compel the insured to continue to maintain the policy or to restrain him from surrendering it for value.On a construction summons, it was held that no trust was created in favour of the infant and that the executors of the insured were entitled to the policy moneys and were not obliged to hand over them to the godson. At p.805, Farwell J. observed :-

In essence, it was also a construction case, and on this basis it was sought to be distinguished.

15. A procedural step taken in Engelbanch and Sinclair gave rise to yet a further problem beset with difficulties. In Engelbach, the policy moneys were by arrangement paid to a firm of solicitors on account of whoever might be held to be entitled thereto and in Sinclair the insurance-money was paid into court to the credit of the matter under adjudication between the rival claimants. Thus, in both cases, the person for whose benefit the policy was effected did not come into possession of or retain the policy moneys. In both cases, the successful claimant was the estate.

16. The position of the sister beneficiary in this case is different. The Insurers have caused to be paid over to her agent the $3 m. The estate of the Insured lays no claim to it. The.money so paid over is being held by her agent for release to her pending the resolution of the Commissioner's claim.

17. Cleaver, Engelbach and Sinclair were reconsidered in In re Schebsman [1944]1 Ch 83, where a departing employee arranged with his ex-employer to have benefits to be paid by periodical payments to himself and after his death to his widow and upon her death to his daughter. The case was concerned with the right, if any, of the payees as strangers to the agreement. It was decided that it was the manifest intention of the agreement between the employee and his ex-employer to allow the surviving widow to receive the payments beneficially and that the husband employee, since deceased, could not have required the Ex-employer divert these payments to anyone else. The decision was affirmed on appeal. Again construction was in issue. The judgment of Uthwatt J. was based on an imperfect and uncompleted voluntary gift of an employee's benefits to his widow or surviving daughter but on appeal Lord Greene, M.R. reached the same conclusion on a different premise that the advancement was or was regarded as complete. See p.93. In Schebsman, the trial judge, Uthwatt J. voiced his disagreeement with. Lord Esher's view in Cleaver that a provision for payment to a stranger to the policy had no legal effect but agreed with that of Fry L.J. that such a provision was binding and its non-payment would constitute a breach. Uthwatt J. found Engelbach difficult to follow and observed that the decision could perhaps be justiffied if the insurers were to be taken as mandatories of the insured, merely under instructions to pay the surviving daughter. Such mandate of instructions could obviously be countermanded at any time and would lapse on the death of the insured.

18. In In re. Schebsman [1944]1 Ch 83, at p.103 in the English Court of Appeal, Lord Justice du Parcq summarised the position at common law as follows:-

Hence, so it was acknowledged, with the consent of the parties to the agreement, it would be open to the deceased by himself or his estate "to release or vary the contract in any way he thought fit" and "to waive performance or accept substituted performance". Evidently, his widow and daughter, as strangers to the agreement, were not entitled to interfere. They could not enforce or recover any benefit under it.

19. Schebsman was approved by the House of Lords in Beswick v. Beswick [1968]A.C. 58, where even the rationale for Uthwatt, J. 2 decision in the first instance was rejected by Lord Upjohn and Lord Pearce.

20. In Beswick v. Beswick at p.71, Letters C/D, Lord Reid left it in no doubt that it was a "question of construction of the agreement read in the light of all the circumstances which are known to the parties. In his Lordship's succinct analysis, this question resolved itself  into two namely, whether on true construction the nominee, as the sister beneficiary in this case, held-the money for the benefit of a contracting party "and be accountable to him, for it or whether the parties intention was that the nominee or the sister beneficiary in this case "should receive the money for (her) own behoof and be entitled to keep it". Lord Upjohn openly assailed these earlier decisions. With his attack mounted at these earlier cases Lord Pearce agreed. See p.94, letter E. At p.98,Lord Upjohn also accepted it as an entirely construction question. Their Lordships addressed themselves to these earlier decisions obiter, evidently in deference to counsel's efforts.

21. Beswick v. Beswick was a case where the deceased assigned his business of a coal merchant to his nephew in consideration of a life consultancy for a fee and thereafter an annuity of £5 per week to his widow. After the death of the deceased, the nephew made one payment to the widow and repudiated his liability. The widow sued as the personal representative of the deceased as well as in her own capacity. At p.95 Letters D/E, Lord Upjohn briefly stated the agreed facts as follows :-

            "Much is common ground between the parties :

22. It was held that the widow, as administratrix, was enetitled to specific performance of the promise made by the nephew in his agreement to pay what was in effect an annuity to her and not merely nominal damages on the basis of the actual loss to the esate.

23. At p.95 Letter G, Lord Upjohn continued :

At p.96 Letters C-F/G, Lord Upjohn levelled his criticisms at these said earlier decisions :-

"My Lord, if I may pause here for a moment, I have the greatest difficulty in seeing how In re Engelbach, to which we were referred, can have been rightly decided. In that case, a man took out a policy payable to his daughter on attaining 21; she was then one month old. He died. She attained 21 and the policy moneys were paid to her, but she was persuaded to pay them into the hands of a stakeholder pending a decision as to the legal rights of the parties and it was held that the estate of the father was entitled thereto. In my view, she was badly advised. The moneys were paid to her as provided by the terms of the contract; for her own use and benefit, I should have thought plain.  In In re Schebsman both at first instance before Uthwatt J. (as he then was) and in the Court of Appeal, it is clear that this case occasioned, some difficulty. I find the explanation given by Luxmoore L.J. and of Uthwatt J. unsatisfactory. Why should the insurance company merely be regarded as a mandatory to pay the policy moneys due to the assurer to his daughter presumably as his agent. This seems to me unrealistic. In re Sinclair's Life policy is perhaps distinguishable on its facts for the insurance company paid the money into court and it was therefore difficult for the infant to show any title thereto but in so far as Farwell J. held at the end of the judgment that if the money had been paid to the infant, he would hold it as constructive trustee for the estate of the godfather, I disagree with him."

24. I have set out fully the unsatisfactory aspects of the earlier cases,which have hitherto been closely examined. The doctrinal concepts involved have been debated and at times denounced. The conclusions, which they seemingly founded could well be supported by the special contractual provisions considered in the individual cases, but they have themselves been demonstrably flawed. Mr whaley pressed these earlier cases upon me, and they are referred to virtually for the purpose of disregarding them. What seems to have been consistently affirmed is the settled common law position, particularly in relation to the right of a recipient to whom payments were intended to be made beneficially and not as a mere agent accountable to a benefactor or his estate. In the House of Lords, there was "no real dispute" as to these rights at common law. It is a matter of construction and tenor of the policy, applying these common law principles in the light of the nature of the transaction.

25. This position at common law, as stated by Lord Justice du Parcq in Schebsman and reiterated in Beswick v. Beswick, has been embraced by MacGillivray and Parkington on Insurance Law, 8th edn., p.643, para. 1378 & Diamond on Estate Duty 15th edn at p.p. 527 & 528, "Estate Duty Implications". ("Lord Wilberforce" referred to in para.1378 at p.6.4.3 Macgillvray & Parkington should read "Lord Pearce".)

26. The common law position seems to be well entrenched. As a stranger to the Travel Insurance Policy, the sister beneficiary could not enforce it. There was nothing in the policy which, so it was also conceded, set up a trust in favour of the sister beneficiary. The sister was unable to prevent the Insured or his legal representatives from agreeing with the Insurers to cancel or otherwise terminate the policy or change its terms, including revocation and substitution of the nominated beneficiary. Nor could the sister beneficiary prevent the Insured or his legal representatives from abandoning the policy or waive all the entitlements thereunder. When money is payable under a life policy to a stranger to it, "it could be shown that, the beneficiary was intended to take merely as agent" (emphasis added) "but in practice that would rarely be so". See P.528 Diamond 15th ed. If the sister was meant to be beneficiary entitled in her own right, the Insured could not in his life-time or his estate after his death, unilaterally direct the Insurers to make payment to someone else in defiance of  the said endorsement. The Insurers would have been entitled to ignore the direction and simply perform their contractual obligation under the policy by paying either the estate or the nominated sister beneficiary.

27. Neither the Insured nor his estate had resorted to termination, abandonment or waiver. No point was taken that the mere capability of the Insured to initiate these destructive measures would equiparate the situation to that in which estate duty was leviable under section 6(1) (a) of the Ordinance on account of his "competence to dispose".

28. I shall deal first with section 6(1)(a). Mr Whaley for the Commissioner of Estate Duty submitted that Gilman's response at least reflected the Insurers utter indifference to the destination of the insurance money and the identity of the beneficiary. Their concern was wholly administrative, with regard to the reporting of a request for revocation and its authenticity. No notice of change in the recipient would likely be resisted. In practical terms, the Insured or his estate was arguably free to re-nominate a beneficiary without consulting the Insurers. Counsel further stressed that it was not an essential term in the Travel Insurance Policy that only the payee "and no other person" should be paid and that consequently Condition 6 merely prescirbed the procedure for formally recording the exercise of an unrestricted power to re-nominate, though its non-compliance would affect validity. Counsel seemed to suggest that the right to intercept was not otherwise abrogated in the policy. Hence, so Mr Whaley contended, the Insured and his estate had a right or an implied right to deal unilaterally with the policy moneys, including the power to intercept them at will, and the Insured or his estate was, therefore competent to dispose of them at the time of his death for the purpose of section 6(1)(a) of the Estate Duty Ordinance.

29. The policy clearly provided no express right to intercept the insurance-money. Insofar as Mr Whaley could be taken as having assumed the subsistence of a right to freely dispose of the insurance-money, his assumption must be premature because there was no such right unless it could be shown that the sister beneficiary was intended, on proper construction of the policy, to receive merely as agent of the Insured and not in the true sense of the word of "beneficiary" to hold for her own benefit. It was agreed on all hands that this case falls to be decided on the construction of the terms of the Travel Insurance Policy. The real intention of the parties to the policy is to be sought for in this Travel Insurance Policy itself. No unilateral right to intercept could be implied from the indifference and the accommodating attitude of the Insurers. Moreover. for the reasons I shall endeavour to give, I perceive the parties' intention as allowing the sister to hold and enjoy the insurance-money for herself beneficially, and such an expressed intention would leave no room for the contended intention to be implied.

30. This Court must therefore focus on how payment of the policy moneys was intended to be held. The absence of any provision for limiting payment to the payee "and no other person" is evidently indeterminative and can be of but little assistance. If the intention of the parties to the Travel Insurance Policy was to pass the property in the insurance-money for the payee's own behalf; and  not on behalf of the Insured "and be accountable to him for it", the election to pay the sister beneficiary as one of the alternate payees would be sufficient to give the sister beneficiary "at common law a good title to the moneys against the whole world". See In re Schebsman [1944]1 Ch 83 at p.90 per Lord Green M.R. And she "could keep it" and "may dispose of the sums so received as she pleases and is not accountable for them to the personal representatives of the (Insured) or to anyone claiming to stand in the shoes of the Insured".See Beswick v. Beswick, supra. p.95 Letter G, per Lord Upjohn and In re Schebsman, supra. p.103, per du Parcq L.J.

31. To begin with, the sister was named a beneficiary. If she was to receive the insurance-money at the discretion of the Insurers, she must be intended to take it as a beneficiary, as "one entitled for (her) own benefit," "one who is beneficially entitled to property" or "receiver of benefits". See A Dictionary of Law, L.B. Curzon, 2nd edn., Stroud's Judicial Dictionary Vol. 1, 5th edn. p.265 and The Oxford Concise Dictionary. Mrs Clough foresaw the Court's reluctance to search for intention incautiously from one single word, and counsel led me through the policy exhaustively. Much importance was sought to be attached to the need to authenticate the nomination of a beneficiary in the Proposal Form. On nomination, one would normally expect a spouse to be named. In the context of this Travel Insurance Policy, a spouse, if so nominated, could not have been appropriately regarded as a mere trustee Be/she must have been intended to benefit beneficially in his/her own right.  Why is it then that when a surviving sister was nominated as a beneficiary in the policy, she should be differently regarded? If indeed the Insured had meant to have his sister merely taking the policy moneys for the benefit of his estate after his death the other direction to pay his estate through the personal representatives would have been redundant. And there would have been no real need to specifically provide for a valid discharge to come from the sister herself. If she had been intended to receive as agent, her receipt in her agent capacity would have been good evidence of performance by the Insurers in obedience to the policy. Finally, it would have been easy simply to name the sister beneficiary as agent. She was not so named. In the absence of any express provision, Mr Whaley readily conceded that there was no trust created. It is difficult to understand why counsel would not be prepared to make a like concession in the case of his contended agency.

32. There was also no express provision to enable the Insured to revoke or substitute the named beneficiary or otherwise intercept the policy moneys. It was to be short-lived insurance coverage. The Insured would leave Hong Kong and his journey was probably expected to complete in less than 10 days. Premium was in a one-off payment, and there was no possibility of default and no time for second thought. By its-very nature, such a travel insurance policy was transient and no change was envisaged. With the Insured preoccupied and overseas, it could not have been within the contemplation of the parties that any provision was likely to be amended.  Further, it  would have been unworkable for Insurers if unilateral changes had been permissible without notice. The Insurers would not have known whether any re-nomination had been made, and if made, how it was made and on what terms. The Insurers would not have been able to properly discharge their obligations without endless enquiries. That burden must be heavy. They would have run the risk of being involved in unwelcome litigation on possibly countless allegations, such as validity, identity, beneficial entitlement, duress and undue influence. I take the firm view that both named payees in this case were intended to be beneficially entitled to the policy moneys.

33. I turn next to section 5 of the Estate Duty Ordinance. The sister beneficiary was the named beneficiary. At first blush, it would appear that there existed an option, in the event of the death of the Insured,either to give the insurance-money to the personal representatives or to his sister. None of the provisions in the Travel Insurance Policy really supports the proposition that its primary object was to benefit the Insured or his estate. It is, in my judgment, also impossible to spell out any intention to give such an  object to benefit the estate, be it primary or otherwise, an overriding effect. The endorsement sought to qualify the general provisions of the policy. The endorsement in question was annexed to the policy, and its terms could reasonably be taken as having been additionally selected by the parties themselves to modify the standard form in use. The naming of the sister as a beneficiary was in writing and was, as required, authenticated by the Insureds signature. The object to benefit the Insured or his estate was expressly made subject to this endorsement which provided an alternate mode of performance by the Insurers in the event of fatal accident. The endorsement had manifestly created at least an object of fundamental importance if not also of equal or even higher status. After all, the general provisions of the policy could not be free-standing, independently of its endorsements. The requirement of the Insureds signature against a nomination other than that for a spouse demonstrated the importance attached by the Insurers to such written or typed instructions. The endorsement here coupled with such a nomination had earned a place of prominence of its own. In the event of death, the Insurers had thus an option to pay either the Insured s estate or his sister as a beneficiary. Primary or subsidiary, in my view, the Insurers were not inextricably tied to the object to benefit the Insured or his estate but free to exercise one option or the other. The Insurers in this case had paid the policy moneys over to the sister beneficiary. The exercise of their option was not at issue.

34. If indeed the Insurers must, under the policy, pay  the personal representatives in priority without any discretion, it is inconceivable that the sister or anyone need be authorized to sign for a "full and binding discharge". That would be absurb as the personal representatives themselves would have had to be asked as the first recipient to provide a valid receipt. Mr Whaley's submission on section 5 of the Estate Duty Ordinance appears, therefore, to be wholly inconsistent with any need to confer on the sister beneficiary power to give a good discharge.

35. In my view, the estate enjoyed no such prior or exclusive right to the policy moneys as Mr Whaley maintained. In conclusion, the policy moneys did not vest in the estate in priority. Section 5 had no application. The Insured or his estate was not entitled to intercept the policy moneys at will and was not therefore competent to dispose of them as, envisaged by s.6(1) (a) of the Ordinance. The sister has been paid the insurance-money. She "could keep it" and has acquired "at common law a good title to (it) against the whole world". In my judgment, the Commissioner fails in his claim to duty on the $3m. I make the declaration prayed for in paragraph (1) of the originating summons with an order nisi for costs against the defendant.